How Aging Demographics and Globalization Will Change the Way We Live

Main Menu

A Test in France

France’s recent cabinet shakeup has a least banished some in the government who would resist needed fiscal and economic reform. Former Economy Minister Arnaud Montebourg heads that list. But, sadly, much ambiguity remains. For all President François Hollande’s sudden action, it is still not clear whether he genuinely wants reform. The question is larger than France, too, for it will determine whether the euro zone’s second largest economy will help resolve its crisis or exacerbate it and whether the union will become an extension of Germany or a more balanced arrangement.

The facts admit to two interpretations of President Hollande’s action. It could be that he truly wants reform and Montebourg stood in the way. But it is also plausible that he fired Montebourg just to maintain his pose as reformer in the delicate diplomacy that he is presently conducting within the European Union (EU). In order to buy time to bring his government’s budget deficits into line with EU mandated limits of 3.0 percent of gross domestic product (GDP), he has promised Brussels that his government will pursue both long-term budget restraint and fundamental economic reform of the sort promoted by Germany, in particular tax relief and greater flexibility in labor markets. Even if he had fundamentally agreed with M. Montebourg’s complaints about what the ex-minister referred to as the “trap of austerity,” his position in these negotiations would have forced him to act, especially since Montebourg was also organizing something of an internal revolt within his Socialist Party.

Still, even with continued ambiguities, Montebourg’s departure serves political-economic reality. France simply cannot abandon efforts at budget austerity. True, such policies impede economic growth, as Montebourg claimed, but a rejection of budget discipline, for whatever reason, would jeopardize the government’s ability to borrow at all. Past budget excesses have so loaded global capital markets with French debt that any hint of budget ease now would cause investors to balk at any new purchases and probably prompt them to dispose of what French debt they already hold. The cost of financing to Paris would rise accordingly, perhaps to unsupportable levels. To be sure, other countries in Europe’s periphery face more dire circumstances than France, but that fact does little to relieve Paris of these debt imperatives.

Since France cannot avoid the burdens of austerity, its only effective economic answer is the fundamental reform that Hollande is now promising the EU. It is the only way to make the economy more competitive and dynamic and so able to grow despite the effects of austerity. Hollande is telling Germany and the EU that he recognizes this reality. Montebourg’s cashiering would seem to underscore the president’s message, as does his choice of a successor in the economics ministry. Emmanuel Macron, after all, has pledged to “restore the confidence of our partners, investors, and the world.” But for all this, doubts remain about this government’s commitment.

It is, for instance, no small thing that Hollande campaigned for office on a line very different from the one he has now adopted. Indeed, his campaign rhetoric sounded much like the position that got M. Montebourg fired. Even if Hollande has changed his thinking, the clear revolt within his own party raises questions about how much he can get done even with the best of intentions. Recently, he added these doubts by cutting the ground out from under his new economy minister. When only days after taking office, Macron spoke of modifying France’s statutory 35-hour workweek, he was quickly forced to backtrack, no doubt under pressure from above.

Meanwhile, the actual reforms put in place are far from extensive enough. While the government has announced corporate tax relief, presumably to free resources for development, it has also announced that it would make up much of the lost revenue with an increase in value added taxes (VAT). The burden, then, has not so much lifted as shifted. And then there are France’s intrusive labor laws. Because these rules create huge difficulties in hiring, firing, and setting work schedules, they lie at the root of France’s high unemployment, particularly youth unemployment, and also the ability of French business to react flexibly to changing economic conditions. Yet for all the clear need and Hollande’s promises, Paris has only changed labor laws at the margin and most of the relief accrues only to firms that sign onto the government’s employment objectives, hardly a way to increase business’ flexibility. Meanwhile, Paris has not even begun to address the licensing and regulatory strictures on products that also have stymied flexibility in French industry.

If this behavior is indicative, then one can only conclude that President Hollande is not really serious about reform, that, rather, he is only using gestures in that direction to aid his negotiations with Germany and the EU. If this is the case, then France has little chance for growth. Instead of adding to the euro zone’s economic resources, France will drain them, burdening its stronger members, most notably Germany. And since no nation, including Germany, will take on such burdens without also demanding control, the failure of this government’s reform agenda will also hasten the day when Paris will have to follow Berlin’s lead ever more thoroughly.